No faith in FAIT?
James Pethokoukis recently tweeted a Goldman Sachs forecast for growth, employment and inflation. This caught my eye:
That forecast is not consistent with the “Fed’s goal under its new framework”, at least according to my understanding of the framework. To achieve a 2% average inflation rate for the 2020s, the Fed would need to bring inflation down below 2% in future years, in order to offset the above 2% inflation of the past few years.
Of course not all policy failures are equal. If Goldman Sachs is correct, the Fed will still have done far better than during the Great Recession. A modest miss on the upside is far better than a miss on the downside. But “good enough” should not be the goal. The Fed should try to do the very best it can. I will be very interested in seeing the next set of Fed forecasts for inflation. If they are serious about FAIT then the forecast for inflation in 2023 should be below 2%. Unfortunately, I don’t expect that to occur.
Tags:
16. November 2021 at 17:59
I’m glad you reference 2023 as a plausible “correction” year for FAIT–and by extension NGDP growth rates (sub 4% Oh Glorious Hypermind?). I think that the second quarter of 2022 is going to be revealing with respect to price levels for durable goods, oil, and food products, and freight costs. Not enough to stop the complaining in the media, but enough to make inventory managers rethink some of their desperation buying.
House Speaker Kevin McCarthy will get to claim credit for restoring $2 gallon gas for all the red-blooded, truck driving, true Americans.
16. November 2021 at 18:46
“To achieve a 2% average inflation rate for the 2020s, the Fed would need to bring inflation down below 2% in future years, in order to offset the above 2% inflation of the past few years.”
Shouldn’t the fact that during the 2010s, the inflation rate was persistently below 2%, and the Fed constantly commented that it was lower than desired, factor into the Fed’s 2% AIT going forward? In other words, I’m not sure it should be considered a failure if the rate ends up being between, say, 1.8 to 2.5% for the next few years.
16. November 2021 at 19:02
Ryan, You said:
“Shouldn’t the fact that during the 2010s, the inflation rate was persistently below 2%, and the Fed constantly commented that it was lower than desired, factor into the Fed’s 2% AIT going forward?”
I’d say no, as make-up policy is useless unless it’s announced ahead of time. And the Fed had no FAIT policy in place during the 2010s. Also, some Fed officials have suggested that the clock starts around the end of 2019.
On the other hand, if inflation were to average slightly above 2% I certainly wouldn’t view that as a major failure, just less than perfection.
17. November 2021 at 04:42
As the economist, who in my opinion, is the one who has advanced monetary theory (and therefore prescriptions for policy) the furthest toward what is required, I expect you to also be most critical of the Fed when it falls short. But I also expect you to be nuanced with phrasing like “all policy failures are not equal”. As well as “a modest miss on the upside is far better than a miss on the downside”——which is also a recognition that Goldman, at least, is directionally on the right side. Which in itself is pretty good evidence of effectiveness. And for sure “good enough” should not be the goal——as that already would be the first step toward true failure.
So I too hope Powell sticks to prior statements. Although, I am not completely sure where his starting point should be in measuring “2” percent——but that’s irrelevant. As “I am like Goldman” just appreciative of better.
Keep it going. It is impossible to believe you are not an influencer——-but if for some reason “Scott Sumner” is not, people just like him are. Good enough for us all.
17. November 2021 at 05:50
Just noticed Shelton’s opinion piece this morning. She makes the undeniable point that it is not enough to have the right framework, but also be able to read tea leaves correctly. Although, when reading “tea leaves” correctly is tied to “tightening now” I tend not to distinguish such policy as different than the standard “bond vigilante” approach.
And indeed, she seems to come to bury Caesar not to praise him —-as she accuses Powell of being erratic thru his whole term. It is not as if this was not forecast——perhaps not this high—-but, c’mon, we live in a crazy Covid world which has distorted things in the short run. Not exactly easy to guess the path of a cyclone——but one might more easily guess it’s duration.
She is not the first person to write of the “pretense” of being able to to implement a FAIT policy——-she certainly does not envision NGDP targeting——-but why is FAIT any more a pretense than targeting any inflation rate or any employment rate?
She is going with the GOP flow. Dems have caused inflation (they have caused increased and wasteful spending—-in my view) is one of the key political attack points. She then creates the standard laundry list one reads on PJ media.
I believe Scott has said her analysis of gold standard was not without merit——-and (assuming that is correct) it shows a good understanding of monetary policy. But what she wrote today ——appears political to me in its entirety—-and gives it away with her opening comment.
17. November 2021 at 06:09
PS. I assume Government actions must be factored into Fed implementation. My point is Shelton makes no real analytical statements—-other than repeating the GOP talking points. The Fed is supposed to be apolitical. I assume it takes that position seriously. And while Shelton does not state outright that Powell is a DEM lackey and a dummy too (or “erratic”—-is there a difference?), she is quite willing to sacrifice him on the alter of GOP politics. I am quite happy to sacrifice many left wing politicians on that alter——but most definitely not a Fed Chair who, in my view, as advanced the cause of monetary policy as well as any Chair I can think of.
17. November 2021 at 06:37
TIPS breakevens are nuts:
https://fred.stlouisfed.org/series/T5YIE
3.2% average inflation over the next 5 years! Any one have any ideas? Is the market forecasting some long lasting damage to the supply side (possible with a permanent medical security state, war against CO2)? or is this discounting the risk that some nutter MMT individual takes over as FOMC chair? Something else?
17. November 2021 at 13:20
FAIT is the enemy of the people. If inflation grows proportionally faster than R-gDp, the concentration of wealth ownership is exacerbated.
17. November 2021 at 14:18
For better or worse, this is the flexible part of FAIT. As per a Clarida speech in April 2021:
“Our new framework is asymmetric. That is, as in the TPLT studies cited earlier, the goal of monetary policy after lifting off from the ELB is to return inflation to its 2 percent longer-run goal, but not to push inflation below 2 percent. … Our framework aims ex ante for inflation to average 2 percent over time but does not make a commitment to achieve ex post inflation outcomes that average 2 percent under any and all circumstances.”
Some FOMC participants can/will argue that this is supply side inflation that should not count toward FAIT.
Though Powell said in his press conference that the current rates of inflation were not consistent with the Fed’s price stability mandate, he mentioned the FOMC has yet to discuss whether it counts toward the inflation conditions for liftoff.
I think Powell has arranged the deck so that the FOMC could not so easily renege on the Fed’s new framework. He has credibly committed to act irresponsibly to avoid Krugman’s expectations trap.
17. November 2021 at 22:06
Seems my brilliant reply was lost in the ether, let me try again and see if it’s the italic fonts I used or URL or is Sumner finally censoring me, as he should have done years ago. (Sumner): “To achieve a 2% average inflation rate for the 2020s, the Fed would need to bring inflation down below 2% in future years, in order to offset the above 2% inflation of the past few years. ” – what past few years? If you look at TradingEconomics.com, at US inflation, (link omitted), you’ll see that inflation the past few years has been at or below 2%, so Sumner is mistaken…again. Sumner mistaken, what a surprise.
17. November 2021 at 23:00
Robert Reich makes a different argument:
https://robertreich.org/post/667491205931745280
And a similar argument can be made about groceries:
https://www.foodandwaterwatch.org/wp-content/uploads/2021/11/IB_2111_FoodMonoSeries1-SUPERMARKETS.pdf
The basic argument is that there are oligopolies in our manufacturing spheres and the big corporations are making lots of money raising prices for the rest of us. Apparently there are facts to back this up.
I have no idea if any of this is true, but I am afraid that there is at least some truth to these arguments. As Adam Smith said “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
So maybe there is some truth to the oligopoly theory of inflation.
On the other hand I do not see how this can explain the world wide inflation going on now.
18. November 2021 at 05:13
@Ray
Because my memory can be randomly accurate (although still often wrong—:), Scott uses sometime in 2019 as the starting point—-because that is when Powell stated his AIT policy——although my equally randomly precise memory does not recall Powell actually stating a starting point. I believe it would have been valid to use the starting point of his appointment —-even if the policy was articulated in 2019.
The other problem on time frame is on the future side. I am virtually positive that Powell has not chosen a future date—-or more importantly——over what rolling time frame does this target exist? Scott has chosen 2030—as an example, not as the “right time frame” per se—-but because if it has not been 2% on average by then——it was almost certainly a miss on the Fed’s part.
While I like the target idea——as in AIT——because it allows for flexibility in short run—-some have claimed in criticism of Powell that it is absurd to believe one can hit a target on average—I.e. AIT. Judy Shelton is just one of many—-(To me she is a political flunky)—-who have moaned about this. That critique strikes me as ridiculous—-unless fixed targeting is also not possible.
Plus—-who knows what the next Fed chair will believe? After all, look who is picking him.
18. November 2021 at 06:32
@ Larry
Reich’s thesis is that competition prevents prices and profits from rising in an inflationary environment with supply constraints. I guess a corollary is that market power must find “excuses” before it can exercised.
In order to believe Reich you’d have to think that American businesses had decided, in the past, to forgo profits in order to wait for politically palatable reasons to raise prices. And I guess you’d have to believe that a terrible pandemic was your politically palatable reason? I don’t buy it.
Record profits in a growing, inflationary environment should be the norm, not the exception. “80% of companies topping analysts forecasts” is irrelevant to the whole argument. Stock buy backs are irrelevant to the whole argument. Intelligent men coming up with irrelevant arguments doesn’t speak well for good faith.
I’m not saying that there’s no place for antitrust in America. I’m just saying that “corporate power” isn’t the variable that explains this period of inflation.
18. November 2021 at 07:06
Economists don’t know a debit from a credit. Bank lending is inflationary. Non-bank lending is non-inflationary.
The FED’s monetary transmission mechanism is interest rates. QE is interest rate suppression. The transmission channel exacerbates a Cantillon effect, boosting asset prices.
Secular stagnation is the deceleration in velocity. But the FED’s monetary offset to a decline in AD, is to inject new money. That is backwards. The correct response to a decline in velocity, to a flight to safe assets, is to drive the banks out of the savings business (activating monetary savings). This makes the banks more profitable and doesn’t reduce the size of the payment’s system.
18. November 2021 at 07:09
link: “Since 2008, Monetary Policy Has Cost American Savers about $4 Trillion”
https://wolfstreet.com/2021/11/17/since-2008-monetary-policy-has-cost-american-savers-about-4-trillion/#comment-388972
18. November 2021 at 07:23
@ Spencer Bradley Hall
“Since 2008, Monetary Policy Has Cost American Savers about $4 Trillion”
I don’t think the term “cost” really applies. Consider the following modification to that title:
“Since 2008, Monetary Policy Has Saved American Borrowers about $4 Trillion”
18. November 2021 at 08:34
@ Alex S.
AD = money X velocity. The injection of new money un-necessarily lowers the real rate of interest. The release and activation of savings raises the real rate of interest.
Secular stagnation is nothing other than the impoundment and ensconcing of monetary savings in the banks.
link: Changes in Wealth and the Velocity of Money — G. J. Santoni
https://files.stlouisfed.org/files/htdocs/publications/review/87/03/Changes_Mar1987.pdf
As the economic syllogism posits:
#1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
#2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…
#3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods” (CAPEX)
see:
#1 “Commercial Banks and Financial Intermediaries: Fallacies and Policy Implications–A Comment Leland J. Pritchard Journal of Political Economy
Vol. 68, No. 5 (Oct., 1960), pp. 518-522
#2 “The case against commercial bank saving accounts”
Leland James Pritchard 1964 Banker’s magazine
#3 “The economics of the commercial bank : savings-investment process in the United States” Leland James Pritchard 1969
#4 “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
#5 “Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386
18. November 2021 at 08:58
Justin, It seems to assume the inflation is transitory, but worse than the Fed currently expects.
Ray, You said:
“If you look at TradingEconomics.com, at US inflation, (link omitted), you’ll see that inflation the past few years has been at or below 2%, so Sumner is mistaken…again.”
LOL. Earth to Ray, we are seeing a surge in inflation.
Alex, Interesting quote. Perhaps the Fed actually aims for temporary PLT, not AIT.
18. November 2021 at 09:39
Bernanke turned the world upside down. He was responsible for the nonbanks contracting by $6.2 trillion while the banks remained unaffected (since 1933), expanding by $3.5 trillion.
The suppression of interest rates, QE combined with remunerating IBDDs, destroys the velocity of money. The NBFIs are not in competition with the DFIs, the NBFIs are the DFI’s customers.
Savings flowing through the nonbanks never leaves the payment’s system, as anyone who has applied double-entry bookkeeping on a National scale should already know. And it is noninflationary, representing an increase in the supply of loan funds, but not the supply of money.
WSJ: “In a letter of March 15, 1981, Willis Alexander of the American Bankers Association claims that: ‘Depository Institutions have lost an estimated $100b in potential consumer deposits alone to the unregulated money market mutual funds.’ As any unbiased banker should know, all the money taken in by the money funds goes right back into the banks, in the form of CDs or bankers acceptances or other money market instruments; there is no net loss of deposits to the banking system. Complete deregulation of interest rates would simply allow a further escalation of rates by the banks, all of which compete against each other for the same total of deposits.”
Written by Louis Stone whom the movie “Wall Street” was dedicated to – Vice President Shearson/American Express
18. November 2021 at 09:55
The deceleration in interest rates is caused by the deceleration in money velocity. The deceleration in the velocity of circulation is because: “Disintermediation is Made in Washington’.
Contrary to the idiots: there is no “Penalty on Thrift”. The egregious policies are driven by the ABA. See Barron’s:
1) “Forgotten Man? Washington Again Is Threatening to Penalize the Thrifty” Jun. 6, 1966
2) “Up the Down Staircase, The New Economics Doesn’t Know Whether It’s Coming or Going” Sept. 26, 1966
3) “Ceiling Zero. The U.S. Must Take the Lid Off Money Rates” Nov. 26, 1967
4) “Men and Money, Savers of Modest Means Deserve a Decent Return” Jan. 19, 1970
5) “Q Marks the Spot. All Ceilings on Interest Rates Should Be Lifted” Dec. 28, 1970
6) “Maximum Mischief, Ceilings on Interest Rates Must Go” Mar. 13, 1973
7) “Supreme Interest. The Banking Agencies Have Finally Done Something Right” Jul. 23, 1973
8) “No More Wild Cards, Congress Has Dealt Savers Out of the Money Game” Oct. 2, 1973
9) “Poor Joe DiMaggio. It No Longer Pays to Save at the Bowery”” Sept. 22, 1975
The ABA was behind the Depository Institutions Deregulation and Monetary Control Act (which destroyed the thrifts, caused the Savings and Loan Association crisis, or “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995”; and created the U.S. July 1990 –Mar 1991 economic recession).
As predicted in May 1980, the GSE’s picked up the slack.
All the payment’s systems savings are un-used and un-spent (unless their owners activate them), lost to both consumption and investment (the singular cause of negative interest rates and secular strangulation — not robotics, not demographics, not globalization, not monopolization).
No, contrary to BCA Publications LTD. The banking system is not: “chiefly a conduit through which the savings of the public are pooled in order to finance investment activity in the economy”.
The Romulan cloaking device (payment of interest on interbank demand deposits, on a “Master Account”), vastly exceeded the level of short-term interest rates which was explicitly illegal per the FSRRA of 2006. That’s why there wasn’t a “V” shaped recovery.
The 1966 Savings and Loan Credit Crunch (when the term “credit crunch” was coined) is prima facie evidence. Bernanke mistakenly thought that the GFC was a capital crunch (which destroyed $1 trillion in demand deposits).
18. November 2021 at 10:01
Why was there not a V shaped recovery from the GFC?
Whereas the 1966 Interest Rate Adjustment Act created a .50% interest rate differential in favor of the Savings and Loan Associations (the thrifts, the nonbanks), the Emergency Economic Stabilization Act of 2008 provided a preferential interest rate differential in favor of the commercial banks, which induced nonbank disintermediation. Disintermediation is a term that has only applied to the nonbanks since 1933.
Raising FDIC deposit insurance from $100,000 to unlimited did the rest.
18. November 2021 at 12:48
The U.S. followed Japan’s 1996 lead, a blanket guarantee. Tim Geithner wanted FDIC Chairman Shelia Bair to provide full guarantees for bank holding company debt (like the Europeans). Look what that did for them.
18. November 2021 at 13:22
@ Scott H.
Thanks for the reply.
You say:
“I’m not saying that there’s no place for antitrust in America. I’m just saying that “corporate power” isn’t the variable that explains this period of inflation.”
And I do not disagree with you. Corporate power may not be driving this period of inflation especially since inflation is occurring in other countries as well.
But I do think oligopoly is a real problem and has gotten worse and will continue to get worse to the detriment of us all.
So even if Reich is wrong re: inflation, I believe he is right about oligopoly.
18. November 2021 at 13:40
@Sumner: “LOL. Earth to Ray, we are seeing a surge in inflation.” – does not comport with “To achieve a 2% average inflation rate for the 2020s, the Fed would need to bring inflation down below 2% in future years, in order to offset the above 2% inflation of the past few years.” – do you even know calculus and/or averages, Dr. Sumner? Look at the TradingEconomics website for inflation, and you’ll see that in “the past few years” inflation has been below 2%. Only in March of this year did it pick up above 2%. So to achieve “average” inflation below 2%, it won’t take much at all, if inflation turns out to be transitory, as Goldman Sachs in fact says it will be in the very article you cite (they are in fact saying we’ll have deflation again soon). Michael Ruelle tried to save your argument but it’s not convincing.
@Larry @Scott H – you are rehashng arguments made literally 70 years ago by liberal economist John Kenneth Galbraith.
18. November 2021 at 14:24
Sumner’s commies at MSNBC were following Rittenhouse jury bus.
FBI raids Virginia’s mom’s house for standing up to CRT.
Chinese Tennis champ missing….
Marxism is totalitarianism folks.
If you don’t like capitalism, then try anarcho-syndicalism. But don’t let Sumner’s commies and “social justice warriors” intimidate you.
Stop Sumner, before he and Klaus destroy humanity.
Stopcommiesumner.com coming soon. I’m building it to save humanity
18. November 2021 at 15:52
He sold his soul to the cabal. 15th most influential.
He’s secretly working with Klaus behind the scenes to turn us into borgs!
INTO BORGS!
18. November 2021 at 16:33
Ray, LOL, you are hopeless.
18. November 2021 at 23:16
@SS – OT your man Worobey getting a lot of press for Team Wuhan Wet market, see: today’s CNN and tinyurl.com/3tbva33s Note how close the WIV is to the wet market (6 miles, and they used to, say workers, sell lab animals to the wet market for human consumption). But the weight of evidence says that Ground Zero for the C-19 outbreak is still unknown, even after China’s sanitation of evidence, literally. But don’t let facts get in the way of your confirmation bias. You should do a piece on this.
19. November 2021 at 05:48
See how the Overnight Reverse Repurchase Agreements: Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations (RRPONTSYD) tanked crypto, etc.?
19. November 2021 at 05:53
Wrong series: The Foreign one:
Liabilities and Capital: Liabilities: Reverse Repurchase Agreements: Foreign Official and International Accounts: Wednesday Level (WLRRAFOIAL)
https://fred.stlouisfed.org/series/WLRRAFOIAL
19. November 2021 at 13:46
Ray, “You should do a piece on this.”
Already did.
20. November 2021 at 09:16
Interest expense on the Federal debt of $562,388,232,682.17 in 2021 going higher in 2022.
The FED only returned $54.9 billion to the U.S. Treasury in 2019.
“build back better” = Something’s got to give.
20. November 2021 at 10:04
#1 Chairman Jerome Powell: “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time”
#2 “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
#3 “the correlation between different aggregates [like] M2 and inflation is just very, very low”.
So, Powell delayed the reporting of the money stock on the Federal Reserve Board’s Statistical Release H.6, “Money Stock Measures”
Nothing has changed in > 100 years. The price of oil will peak when long-term monetary flows peak, volume times transaction’s velocity (proxy for inflation), in January 2022.